Time of the essence in reforming state's public pension drain

Gov. Tom Corbett likens Pennsylvania’s public pension problem to a tapeworm, a parasite that devours new revenue as fast as an improving economy can create it.

“We have to consider everything,” in fixing the problem; it’s the “tapeworm of the budget,” he told a Digital First Media editorial board meeting last week.

Corbett called pension reform the one thing he seeks to accomplish this year. Property tax reform, he says, will have to wait.

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Corbett’s call to action is not without merit. The public pension drain has escalated to a crisis in Pennsylvania with nearly $700 billion in year-over-year cost growth robbing state coffers of 62 percent of any new revenue.

In recent years, both the state employees fund (SERS) and public school employees fund (PSERS) have accrued unfunded liability amounting to billions of dollars a year, according to Charles Zogby, secretary of the budget. The funds’ current unfunded liability is $41 billion, not including future shortfalls.

Just to get the funds back on good footing would require a tax increase of $9,000 on every household in Pennsylvania, Zogby said.

The story of how Pennsylvania’s public pensions got to this point can be explained, but not without pain. It’s a story of generous benefit increases without correponding changes to contributions. It’s a timeline of “kicking the can down the road,” as Zogby puts it, intentionally underfunding the systems and pushing the liability into the future. In 2001, the Legislature moved to enhance member benefits by increasing the multiplier that calculates pension amounts. In 2002, employer contributions from school districts and government were capped. In 2003, Act 40 was passed to restrain future growth in employer contributions.

And, throughout the time, investment growth was nil, sending the funds into a downward spiral.

Unlike 401(K) or private investment funds, a defined benefit pension plan maintains a liability in payout no matter what happens to the fund’s investments. While SERS and PSERS fell in value, liabilities grew. And the tapeworm grew, too.

While the path that brought us here is obvious, the way out is more clouded.

The reform floated most often is moving away from a defined benefit plan to defined contribution, a proposal that was part of a 2010 pension reform package which did not go far enough. Zogby says state officials are looking closely at reforms that have been tried in other states, including changes in benefit calculations, such as capping the salary or rolling back the modifier.

Corbett says a proposal will be part of his budget plan for this year, although he admits his office is down to about two weeks to figure out the specifics. His only hint to the editors’ group was that adjustments to the multiplier could make an important difference.

Both officials stressed changes have to take into consideration what people have already earned and what they are counting on. Current retirees have to feel secure their pensions won’t be affected, they said.

However, what they don’t say is how they plan to convince state employees and the powerful state teachers union that change has to happen.

“The taxpayers get it,” Zogby said. The people of Pennsylvania know this is a crisis. But for pension reform to work, the state needs to get the unions and groups representing public employees on board, as well as the lawmakers.

One way to start might be to enlist the ideas and help of those groups in writing the reforms. Get buy-in first and soften the sell.

Corbett has made his emphasis on pension reform clear to the public. It’s time now to get down to brass tacks and figure out a plan that not only will work but also that will have the needed support.